Keeping the Lights On

By LAN XINZHEN

Keeping the Lights On

By LAN XINZHEN

China reorganizes its power sector to improve efficiency and reliability

Sinohydro Group Ltd., the world’s biggest hydropower and water conservancy facilities construction company,took to the road from September 20 to 21, from Shenzhen to Beijing, to promote its upcoming initial public offering (IPO)planned for the Shanghai Stock Exchange this October.

Sinohydro was established in 2009 to meet the demand of reform of China’s power industry. In April this year, the State-Owned Assets Supervision and Administration Commission decided on reforming power grid enterprises and reorganizing power designing and constructing enterprises.According to the plan, the auxiliary companies of State Grid Corp. of China and China Southern Power Grid Co. Ltd. in 14 provinces, autonomous regions and municipalities, as well as Sinohydro Corp. Ltd.and HydroChina Corp., will be grouped into China Power Construction Group Co.Sinohydro will become the capital operation platform for China Power Construction Group Co.

Moreover, China will also reorganize the auxiliary enterprises of the State Grid Corp. of China and China Southern Power Grid Co. Ltd. in 15 provinces, autonomous regions and municipalities as well as China Gezhouba (Group) Corp. and China Power Engineering Consulting (Group) Corp. into China Energy Construction Group Co. The listed China Gezhouba will be the capital operation platform for the new company.

In China’s power industry market, China Power Construction Group Co. and China Energy Construction Group Co. will be both partners and rivals in power construction and transmission.

Sinohydro’s IPO indicates that reforms to China’s power mechanism are taking root.

Hydropower giant

Sinohydro Group Ltd. was jointly established by Sinohydro Corp. Ltd. and HydroChina Corp. Sinohydro Corp. Ltd.holds 99 percent of shares in the form of businesses of engineering, power investment and operation, real estate development,equipment manufacturing and leasing, while HydroChina Corp. holds 1 percent of shares in cash.

By the end of 2009, Sinohydro Group Ltd. had total assets of 95.56 billion yuan($14.98 billion), operating 18 wholly owned subsidiaries in China, nine holding companies, one joint stock company and 47 overseas offices. It has contracted engineering projects as well as economic and technology cooperation projects in more than 50 countries and regions in Asia, Africa,Europe and the United States, holding 50 percent of the market share in the water conservancy and hydropower industry.

According to an investment report of the construction industry released by Guotai Junan Securities Co. Ltd., in China’s hydropower and water conservancy construction market, China Gezhouba (Group) Corp.holds 25 percent of the market share while Sinohydro holds 70 percent.

According to its IPO prospectus,Sinohydro plans to issue up to 3.5 billion new shares to raise 17.31 billion yuan ($2.53 billion). This will represent close to 35 percent of its expanded share capital and could be the biggest IPO on the Chinese mainland this year. The prospectus said the funds raised will be used to buy new equipment and invest in clean energy projects and public infrastructure construction in addition to supplementing cash fl ows.

Han Xiaoping, chief information of fi cer of China5e.com, a Chinese energy website,said China’s demand for electric power is growing, but the country is restrained by a shortage of coal, causing its power industry to look to alternative fuel sources, primarily hydropower.

Over the next five years China will focus on large-scale hydropower projects, and Sinohydro’s IPO undoubtedly supports this new direction, said Han.

Path to marketization

Until 1985, China had not implemented uniform and planned management mechanism in the power industry. The Central Government was the only decision maker of the whole country’s electricity industry, responsible for resource allocation and directly organizing power production and supply, as well as power investment and construction.

Sun Xiaojie, a professor at North China Electric Power University, said the planned economy practiced by China before 1978 had seriously restrained development of the power industry and led to the country’s power shortages for more than 20 years.

To reverse the situation of power shortages and mobilize the initiatives of localgovernments, enterprises and foreign investors, China started the reform of the power industry in 1985. The reform included two policies: To attract investors to set up power plants, with the power grid managed by the government, and to gradually relax access administration and price administration and delegate oversight to supervise the power industry to local governments.

XIAO YIJIU

The reform has greatly promoted development of the power industry. The newly installed capacity grew at an annual rate of 10 million kw, and by 1995 the total installed capacity had reached 200 million kw.

In March 1997 China started the second round of reform of its power industrial management mechanism, separating functions of government supervision and enterprise operation. The state-owned State Power Corp. of China was established, which served as a power producer without administrative functions. This reform was just the start of the market-oriented reform, and a mechanism of market competition had not been formed. The State Power Corp. of China integrated functions of power generation,transmission, distribution and sales, controlling all the power grids and almost half of the country’s power plants.

In the mid-1990s great changes took place in the country’s power supply and demand: Power shortages were no longer prevalent, the supply and demand was almost balanced and in some regions supply even surpassed demand. The change brought competition to the power generation market,sharpening competition and exposing disadvantages of monopolies.

In 2002, a thorough market-oriented reform of the power mechanism started. Major policies of this round of reform included: Separating assets of State Power Corp. of China into two grid companies (State Grid Corp. of China and China Southern Power Grid Co. Ltd.),fi ve power generation groups (China Huaneng Group, China Datang Corp., China Guodian Corp., China Huadian Group and China Power Investment Corp.) and five auxiliary industry groups (China Power Engineering Consulting(Group) Corp., HydroChina Corp., Sinohydro Corp. Ltd. and China Gezhouba (Group)Corp., and establishing the State Electricity Regulatory Commission as the overseer of the power industry.

JIANG WENYAO

After years of construction China expects to have a total installed capacity of 1.05 billion kw by the end of 2011, having the world’s second largest installed capacity only after the United States.

However, power construction is unbalanced among different regions of China. In the eastern coastal area power supplies fall short of demand, while in central and western regions supplies exceed demand. Since 2007 power shortages have remained a problem in the eastern area almost every year.

The latest round of reform of the power mechanism obviously aims to reorganize the two power grid companies and the four auxiliary groups to strengthen power construction, balance power supply and demand and reverse the regional imbalance of power construction.

“The power construction market is the main content for this round of reform, and regional power markets are the focus of present market construction,” said Sun.

Sun believes, however, there are more urgent circumstances in China’s power industry that should be reformed. Differing from other countries where the power industry is led by private companies, China’s power industry is still controlled by stateowned enterprises. At present, China’s power investment is not yet fully opened to private investors. State-owned power constructing enterprises almost monopolize the country’s power construction projects while private and foreign investors only hold a tiny share. Further, selling prices of electricity are strictly controlled by the government, and the relationship and benefits among power grids, power plants and auxiliary industries need to be further rationalized.